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George Kaloudis is a research analyst for CoinDesk Research.

Consensus 2023 Logo
Join the most important conversation in crypto and Web3 taking place in Austin, Texas, April 26-28.

Silvergate Bank (SI) started in San Diego in 1988 as a savings and loan association (S&L) when that was all the rage. It’s a bank now – for … uh … reasons – that markets itself as a “leading provider of innovative financial infrastructure solutions and services for the growing digital currency industry.”

Basically, Silvergate is the bank for a lot of crypto businesses (1,300+, according to the company website, if you include “fintechs”), which tend to have problems maintaining banking relationships. As such, it’s probably not surprising to learn that Silvergate’s assets under management (AUM) has grown quickly the last few years. Its stock price did, too, by more than 1,500% between November 2019 and November 2021.

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But once FTX collapsed, Silvergate customers fled (withdrawing $8.1 billion in the fourth quarter, aka roughly 70% of total deposits) and U.S. Senator Elizabeth Warren (D-Mass.) sent it a scathing letter. The stock price tanked, down more than 40% in the past month.

Now I’m not here to spread fear that Silvergate is insolvent. After all, Silvergate satisfied the customer withdrawals and has started leaning into cost cuts by way of laying off 40% of its staff and abandoning expensive ideas like the Diem project it bought from Meta Platforms (META) early last year.

What is worth highlighting here, though, is how Silvergate satisfied those customer withdrawals.

Silvergate used something meant for housing as a lifeline

In November, I wrote that the crypto credit contagion was “unlikely to spread to other markets,” but Silvergate just proved me wrong. To satisfy the spike in withdrawals, Silvergate received billions of dollars in advances from the Federal Home Loan Bank (FHLB) of San Francisco, ending 2022 with $4.3 billion of FHLB money on its balance sheet. For context, Silvergate held just $700 million of these advances at the end of September 2022.

To be honest, I wasn’t (and am still not really) intimately familiar with the FHLB when I first read about this – but if the name of the organization wasn’t a dead giveaway that this was strange, then its mission statement stating that the FHLB provides “members with a reliable source of funding for housing finance” should.

The FHLBank System was created under President Herbert Hoover through the Federal Home Loan Bank Act in 1932 with one big goal: lower the cost of home ownership. It empowered FHLB banks to provide liquidity to its smaller member banks, of which Silvergate is one. So, yes, part of the crypto industry was effectively bailed out by a government-sponsored institution whose stated goal is to curtail housing costs.

Of course, this isn’t illegal – else you’d be hearing about it from literally everyone but me. The FHLB is also tasked with providing “liquidity for members’ short-term needs” – and the 70% withdrawal I mentioned above sure seems like a time when liquidity might be needed! Plus, FHLB supports members who support housing finance and community investment (whatever that means).

Enough ambiguity to not be illegal.

But just because it’s not illegal doesn’t mean that we should be happy with it. Sure, I’m glad Silvergate didn’t go under, but isn’t this just another bailout? Crypto supporters would be hard-pressed to convince investors that crypto is legitimate if there’s a government program propping up part of it.

Does crypto need propping up because, well, if so, maybe it shouldn’t be up in the first place?

Seriously, if someone, like a bank, doesn’t want to bear the downside risk of investing in crypto then maybe an entire depositor cohort and loan book shouldn’t be made up almost exclusively of crypto companies. Perhaps banking institutions should do risk management through either stricter collateralization rules or broad diversification across many other industries.

Not to mention, FHLB advances work such that in the event of a bank failure, it is senior even to the Federal Depository Insurance Corporation’s (FDIC) claims. Why is that important? As John Heltman wrote in American Banker, hypothetically “if regulators were to shut down Silvergate or a similar bank that facilitates crypto and owes a Home Loan bank money, the failure could prove more costly to the [FDIC’s] Deposit Insurance Fund.” Such a scenario wouldn’t be catastrophic for the agency whose stickers appear on the door of every bank in America, but it would underscore that crypto is no longer just an island.

So, yeah, crypto contagion did in fact seep a bit into the “real” economy, contrary to what the Federal Reserve suggested in its Dec. 13-14 minutes of the Federal Open Market Committee (FOMC). Sure, it’s still small potatoes: Bank deposits in the U.S. number in the tens of trillions of dollars, dwarfing Silvergate. But we should expect more from the banking institutions that service crypto companies. If crypto was born to be separate from the legacy institutions, then it shouldn’t depend on those institutions in times of need.


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George Kaloudis is a research analyst for CoinDesk Research.